Could taxpayers subtract both a taxable annuity death benefit and a distribution from an inherited IRA on their 2008 Virginia return?

Plain-English summary

Virginia allowed the annuity death-benefit subtraction but denied the inherited-IRA subtraction. The husband received both types of distribution in 2008, and the couple subtracted both on their Virginia return.

The annuity payment qualified because it was a federally taxable lump-sum death benefit paid to the beneficiary under an annuity contract. Virginia allowed that amount.

The inherited IRA distribution was included in federal adjusted gross income. Virginia had no modification allowing an inherited-IRA distribution to be subtracted, so that portion remained taxable and the related assessment stood.

Common questions

Q: Did inheritance alone make the IRA distribution exempt?
A: No. Virginia started with federal adjusted gross income and had no IRA subtraction.

Q: Why was the annuity payment different?
A: It met the specific statutory requirements for a taxable lump-sum annuity death benefit.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-322(C)(32).
• 2012 Va. Acts ch. 305.
• Virginia Public Documents 09-36 (March 31, 2009) and 94-320 (October 20, 1994).

Subject

No provision to allow a subtraction for a distribution from an inherited IRA

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-83

Original ruling text

May 16, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you contest the individual income tax assessment issued to * (the "Taxpayers") for the taxable year ended December 31, 2008.

FACTS

The Taxpayers are a husband and wife. The husband inherited an individual retirement account (IRA) and took a distribution subject to federal income tax during the taxable year ended December 31, 2008. He also received a distribution of a death benefit payment from a life insurance annuity during that same year. The Taxpayers subtracted both the IRA distribution and the death benefit payment from their 2008 Virginia individual income tax return.

Under review, the subtraction for the IRA distribution was disallowed and an assessment was issued. The Taxpayers appeal the assessment, contending the total subtraction was for the death benefit payment from an annuity contract.

DETERMINATION

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meanings as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. The Virginia income tax conforms to federal law in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). As such, any income included in the FAGI of a Virginia resident is subject to taxation in Virginia, unless it is specifically excluded by a Virginia modification pursuant to Va. Code § 58.1-322.

Under Va. Code § 58.1-322 C 32, a taxpayer is allowed a subtraction of "the death benefit payments from an annuity contract that are received by a beneficiary of such contract and are subject to federal income taxation."

In Public Document (P.D.) 09-36 (3/31/2009), the Department determined that in order to qualify for the subtraction allowed under Va. Code § 58.1-322 C 32, a death benefit payment must meet three requirements. First, the source of the payment must be an annuity contract between a customer (the Annuitant) and an insurance company. Second, the annuity payment must have been awarded to the beneficiary in a lump sum. Finally, the payment must be subject to taxation at the federal level.

In 2012, legislation was enacted by the General Assembly clarifying the intent of the law regarding the subtraction of annuity death benefits. Chapter 305 of the Acts of the Assembly codified the Department's policy promulgated in P.D. 09-36 with regard to the requirement that annuity death benefit payments be made in a lump sum.

In this case, the death benefit payment met the requirements for the subtraction of a death benefits payment from an annuity contract under Va. Code § 58.1-322 C 32. As such, the Department allowed a subtraction for the death benefit.

Generally, a distribution from an inherited IRA included in FAGI of a Virginia resident will be subject to Virginia income tax. There is no provision in Va. Code § 58.1-322 to allow a subtraction for a distribution from an IRA. See P.D. 94-320 (10/20/1994). Accordingly, the Department correctly disallowed this subtraction.

Based on the information provided, I find that the Department's assessment for the 2008 taxable year is correct and remains due and payable. As a result, an updated bill will be issued.

The Code of Virginia sections and public document cited and other reference documents are available on-line in the Tax Policy Library section of the Department of Taxation's web site located at www.tax.virginia.gov. If you should have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4903861238.B